DELAWARE CORPORATIONS TURN TO BYLAWS, AGAIN, TO DISCOURAGE LAWSUITS

In Delaware, where half the country’s publicly traded companies are chartered, corporate boards are unilaterally amending their bylaws in an attempt to discourage lawsuits accusing them of breaching their fiduciary duty. Though some courts have sanctioned the latest changes, investors’ rights advocates say they could discourage meritorious litigation and make corporations less answerable to shareholders.

Two types of provisions are at issue. ‘Exclusive forum’ provisions seek to restrict certain litigation to courts in Delaware. ‘Fee shifting’ or ‘loser pays’ provisions require shareholders who bring such suits and fail to prove their claims to pay legal fees for defendants – a major departure from US rules, where each party typically shoulders its own court costs.

While Delaware courts have upheld both types of provisions, exclusive forum bylaws are far more widespread. At least 450 Delaware companies now have exclusive forum clauses in place, according to a search of SEC filings. Only a handful of corporations have adopted loser pays provisions, at least for now.

This is not the first time companies have looked to bylaws or charters to address what they view as a plague of frivolous lawsuits. In recent years, some companies have instituted bylaw provisions requiring binding arbitration for legal disputes, effectively denying shareholders their day in court. Those efforts inspired near-universal condemnation by institutional investors, lawmakers and proxy advisory services.

Loser pays and exclusive forum provisions both deal with so-called ‘intra-corporate litigation’, which includes mergers and acquisition lawsuits and derivative actions – lawsuits brought by shareholders on behalf of the corporation that accuse officers and directors of failing to act in the company’s best interests.